In my post, How To Finance Your Startup, I outlined a basic framework for deciding how to finance a startup.  As a follow-on I wanted to use the framework to highlight the two most common types of financing strategy errors that I see entrepreneurs make.

Don't Miss The Land Grab

Some entrepreneurs start companies that sit in the top left corner of the matrix above - their financial model shows that for little money they can create a big company.  While if they have substantial barriers from day 1 their model may reflect reality, if they don't have initial barriers they'll likely need to raise capital to grab share quickly and assert themselves in their marketplace. 

For example, if eBay were first launched in our current world of extremely low technology costs, the founders would probably be able to make a case that they may not need to raise capital to build a big business.  Hosting the site on the cloud and using what is now relatively basic technology, they might be able to launch the site for a small sum and run it profitably in the near term.  The founders, however, would be remiss not to raise capital in that situation as the real barriers in the auction business (network effects) aren't significant until scale is achieved.  While their business is small it's easier for competitors to challenge them.

This is a typical land grab situation: 1) barriers build with scale and 2) the cost of operating the business is low and therefore the initial barriers to entry are also minimal.  In these situations it's often better to raise capital to expand the business quickly and build the scale required to make a defensible large business.

At the heart of these situations lies a hesitancy amongst some founders to be diluted by the investors.  It's not unreasonable for entrepreneurs to be sensitive to dilution - it's logical.  While simple intuition tells us that owning more of a company will translate into a bigger payout, however, it's not always true.   Being too sensitive to dilution can lead entrepreneurs to miss the opportunity at hand.  At the end of the day its the value of your stake in a company that matters - owning a smaller percentage of a highly valuable asset is often better than owning a lot of a company worth nothing.

In sum, you should take a real look at your company's initial barriers.  If you have a business that can become large and limited initial barriers, you may be better off raising capital early in order to grab enough land to stop competitors.